Strategy Review

Goal 1: Deliver superior shareowner performance

2005 priorities

• Deliver annual contract (budget)
• Execute Fuel for Growth and focus on Free Cash Flow

Our overarching goal is to deliver consistently superior shareowner returns, driven by superior business performance.

We measure shareowner performance by looking at the total returns on our shares (share price growth plus the value of reinvested dividends). Our returns are measured against a broad group of our international fast moving consumer group peers. This group includes our major confectionery and beverage competitors.

Following another good performance in 2005, we have now delivered top quartile returns for our shareowners for both 2005 and for the two year period 2004 and 2005. In 2005, our return of 23% compared to 13% for the peer group. For 2004 and 2005, our return of 57% compares with 35% for the peer group as a whole.

Deliver superior shareowner performance - Peer group average TSR performance (%) over 2004 and 2005

In order to deliver superior business performance we have focused on: accelerating the rate of profitable revenue growth; reducing costs; improving our capabilities; and allocating capital to those brands, businesses and markets which have superior growth and returns.

When we announced our goals and priorities for 2004 to 2007 we also announced financial goal ranges (all on a constant currency basis) for three simple business metrics. Delivery of these financial goal ranges is the key to achieving performance in line with our annual contract (budget):

• Grow revenues by 3% - 5% every year (excluding acquisitions and disposals)
• Improve margins by 50 to 75 basis points each year
• Generate free cash flow of £1.5 billion over the period.

2004 and 2005 financial performance against our goal ranges

	Goal ranges 2004-2007	2004 (52 weeks)	2005
Revenue growth*	3 - 5% pa	5%	6%
Underlying operating margin growth*	50 - 75 bps pa	+50 bps	+30bps
Free cash flow generation **	£1.5bn	£265m	£450m
* at constant exchange rates; excluding Europe Beverages ** includes Europe Beverages and at 2003 exchange rates

In 2005, we saw a further acceleration in our rate of revenue growth. Revenues grew by 6%, above the top end of our goal range. Our confectionery and beverages businesses both contributed to this increased momentum, driven by our higher growth investment, and the commitment of our people to execute our strategies in the market place.

Revenue growth 2003 to 2005*

	2003	2004	2005
Group	2%	5%	6%
Of which:
- Confectionery	3%	6%	6%
- Beverages	1%	4%	6%
* Continuing businesses - excluding Europe Beverages

We increased margins in 2005 by 30 basis points, despite a challenging external cost environment, particularly in the second half of the year in oil, transport and packaging costs. We chose not to sacrifice our growth investment and, as a result, our margin growth year-on-year was not within our goal range.

We are well on track to deliver on our free cash flow goal range. Free cash flow increased significantly in 2005, benefiting from the Group's improved trading performance and our increased focus on improving our working capital and capital efficiency.

We continued to invest significant sums in marketing, growth and execution capabilities, despite the external cost increases. In 2005, our investments in growth and execution capabilities increased by £75 million. We believe that these investments will strengthen our ability to deliver long-term sustainable growth.

Our Fuel for Growth cost saving programme is on track, with £90 million of cost savings delivered in 2005. This brings the cumulative savings from the programme to £180 million since it began in mid 2003. As a result, our cost base has become more competitive, and we have reinvested a significant proportion of the savings in our businesses, as we said we would do when we launched our four-year strategy.

We are making cost savings in many areas, including factory closures, reorganisations and headcount reductions, and also in a large number of efficiency initiatives throughout the Group. These initiatives are reducing complexity, increasing our available capacity, reducing working capital, and improving our ability to execute our business, activities. They span a wide range of areas and include:

• creating shared business service centres, such as the one in Plano, Texas which supports Americas Beverages and Americas Confectionery in handling finance and HR transactional services and consumer and customer support;
• rationalising production, such as the transfers of Halls production from Manchester, UK, to Canada, and Canadian gum production to our more efficient Mexican factory, to increase our manufacturing scale; and
• maximising marketing and trade spend effectiveness - for example, our US beverages and confectionery businesses have partnered on media buying and consolidated advertising with a single supplier.

Delivering Fuel for Growth

	2003	2004	2005
Factories closed/sold*	6	3	6
Headcount reduced	1,000	1,100	1,900
Gross cost savings	£20m	£70m	£90m
All figures are annual and exclude Europe Beverages * Excludes 13 Europe Beverages factories sold in 2006

In the two years following the Adams acquisition, we focused on integrating the business, growing organically and reducing debt.

With the Adams integration largely completed and consistent with our Managing for Value philosophy adopted in 1997, early in 2005 we increased our focus on the allocation of capital in the Group's businesses to invest in the most attractive growth opportunities and drive value creation for our shareowners.

A key development was the announcement of the sale of Europe Beverages for £1.26 billion which was completed in February 2006.

We have also announced our intention to sell other small non-core brands, businesses and assets. The funds raised from these disposals will be reinvested in the business, either via strategic capital investment or bolt-on acquisitions.